Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
NASDAQ:CALA) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’ cash, relative to its cash burn.” data-reactid=”29″>Given this risk, we thought we’d take a look at whether Calithera Biosciences (NASDAQ:CALA) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’ cash, relative to its cash burn.
See our latest analysis for Calithera Biosciences ” data-reactid=”30″> See our latest analysis for Calithera Biosciences
Does Calithera Biosciences Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2020, Calithera Biosciences had cash of US$154m and no debt. Importantly, its cash burn was US$83m over the trailing twelve months. Therefore, from June 2020 it had roughly 22 months of cash runway. Notably, analysts forecast that Calithera Biosciences will break even (at a free cash flow level) in about 2 years. That means it doesn’t have a great deal of breathing room, but it shouldn’t really need more cash, considering that cash burn should be continually reducing. Depicted below, you can see how its cash holdings have changed over time.
How Is Calithera Biosciences’ Cash Burn Changing Over Time?
how much the company is expected to grow in the next few years.” data-reactid=”50″>Because Calithera Biosciences isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 17% in the last year, it seems that the company is ratcheting up investment in the business over time. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Calithera Biosciences Raise Cash?
While Calithera Biosciences does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Calithera Biosciences’ cash burn of US$83m is about 27% of its US$307m market capitalisation. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
So, Should We Worry About Calithera Biosciences’ Cash Burn?
4 warning signs for Calithera Biosciences you should be aware of, and 1 of them is a bit unpleasant.” data-reactid=”59″>On this analysis of Calithera Biosciences’ cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. While we’re the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Calithera Biosciences’ situation. Taking a deeper dive, we’ve spotted 4 warning signs for Calithera Biosciences you should be aware of, and 1 of them is a bit unpleasant.
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Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”61″>This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.